Even when a smaller 1-in-25 year storm will deplete most of our existing reserves. What will we do when the next storm hits?

During my first legislative session as Florida’s Insurance Consumer Advocate, my office monitored many of the bills addressing the homeowners insurance marketplace in our state. However, very few of these initiatives were passed by the Legislature.

Some of the bills had sound public policy arguments but were too aggressive when considering the economic circumstances that our state is currently experiencing. It is abundantly clear no one has proposed comprehensive reforms nor has there been a definitive plan put forward to address our struggling homeowners market.

It is clearly time for policymakers to come together to work on a comprehensive plan incorporating good public policy for homeowners insurance in our state. A comprehensive plan must include changes to Citizens Property Insurance Corporation (Citizens), the Florida Hurricane Catastrophe Fund (CAT Fund), mitigation programs to decrease our hurricane risk and incentives that would facilitate the return of the private marketplace.

Our state faces unique challenges because of our exposure to catastrophic risk. We have had successful and innovative programs such as the CAT Fund, which has largely been successful in stabilizing the availability and cost of reinsurance for our state. However, some reforms have not been as successful. While everyone understood the need for rate relief when Citizens’ rates were rolled back and subsequent caps were placed on the rate increases. Those actions have led to a suppression of rates for private carriers that is no longer sustainable if we want to see a marketplace that offers additional choices and products to consumers.

A plan to stabilize the homeowners marketplace must reform Citizens and the CAT Fund to reduce their exposure to financial losses. Florida has chosen to finance its hurricane risk by relying on assessments on all property and casualty policyholders, which are used to guarantee the repayment of bonds. We also rely on assessments on property insurance policies to finance losses to the Florida Insurance Guaranty Association (Guaranty Association) which pays claims of insurers that become insolvent. While some reliance on assessments is necessary, the risk being financed through the assessment mechanisms has grown considerably. We now have a huge assessment burden that Florida insurance consumers do not fully understand or contemplate when estimating their future insurance costs. The potential assessments are greatest for policyholders of Citizens who are subject to a potential 45 percent assessment as the first source of funding a deficit.

As Florida’s Insurance Consumer Advocate, I believe that consumers should have that information and understand their personal exposure to assessments under the current system as well as the overall potential exposure for our entire state. My office has developed an assessment calculator which can be found at www.myfloridacfo.com/ica/. This calculator will estimate consumers’ potential assessments under their current policies.

Consumers need to better understand the repercussions that could occur under our current homeowners system. Most of the assessments that we rely upon to fund deficits for Citizens, the CAT Fund and the Guaranty Fund are imposed on all types of property and casualty insurance policies. Consumers can expect the assessments on their homeowners policies, auto policies, business policies and most other lines of business for property and casualty insurance. While the amount of total assessments per year for each of these entities is capped and the cost per year may be limited, the overall assessment can continue for many years to follow.

Even a 1-in-25 year storm is likely to generate assessments for the CAT Fund and would exhaust most of the cash resources of Citizens, thereby increasing the likelihood and magnitude of assessments for a subsequent storm. A 1-in-100 year storm should scare us all because it is estimated to result in residential losses of about $50 billion. Citizens, the CAT Fund, and the Guaranty Fund would deplete all their reserves and would need to assess for more than $25 billion to pay claims. The full report regarding assessments and potential losses can be found in the Assessment Calculator link at the above cited website.

The need for reforms should be apparent to everyone. Even when Florida experiences a smaller 1-in-25 year storm, most of the existing reserves will be depleted and what will we do when the next storm hits? There is no doubt that a system this burdened will irretrievably break. You can expect that we will be paying assessments for the next thirty years; more private carriers will leave Florida; more debt will be incurred assuming that we can even bond for funds we may need; policyholders may have to wait a long time to get claims paid and we will all pay higher insurance premiums. We will not be able to solve this problem overnight, but it is critical that we develop a comprehensive plan to fix this system.

Robin Smith WestcottFlorida Insurance Consumer AdvocateTallahassee

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